Why shouldn’t I invest in China?

There’s an excellent article in the 12 Jan Financial Times on investing in emerging markets…found here. The basic message is that there is no correlation between GDP Growth and stockmarket performance, in fact its slightly negative if anything, so be wary when investing in emerging markets.

According to Professor Jay Rittner of the University of Florida,

“Countries with high-growth potential do not offer good investment opportunities unless valuations are low”

Another interesting point made was that in fast growing economies, the companies that end up winning the race may not even be known yet.

“In the 1950s there were more than 100 motorbike companies. The market leader was driven out of business by the cut-throat pricing of a flaky upstart called Honda”

The conclusion in terms of value is that the biggest emerging economy of them all, China, is in a current bubble and valuations are far from low, in both equities and real estate, where valuation metrics are above what Japan was at its peak in 1990. What is frightening with regards to China’s valuations, is that twenty years after Japan’s peak, its equity market is still trading around 70% lower.

Bottom line, be careful of investing in Emerging Markets and secondly, don’t forget Australia’s current reliance on China as any bust could be catastrophic for both our economy and markets.